The inflation rate for consumer prices in the US has clearly peaked and is falling steadily. The latest figure for year-on-year inflation in December was 6.4%, down from a peak of 9.0% last summer. Core inflation (which excludes prices for food and energy) has also peaked but not by nearly as much. That’s because it is food and energy price inflation that has slowed the most. Energy price inflation has halved as oil and gas prices drop back and there has been a peak in food prices. But housing costs continue to accelerate and other services prices fell only a little; so core inflation remains ‘sticky’.
What the latest figures show is that the ‘supply shock’ to prices from supply chain blockages and shortages of food and energy supplies since the Russian invasion of Ukraine have eased somewhat.
Inflation may be subsiding as the US economy slows, but remember, the hit to average worker’s living standards has been significant since the pandemic. Inflation means a change in prices, so even if inflation slows, price levels remain higher than before. Since the start of the pandemic, US consumer prices have risen 15%, but average weekly earnings have risen only 7.8%. Wage increases have actually been higher for non-management workers; the hit to the living standards of professional and lower management staff has been greater. Even so, from the beginning of 2021 to the end of 2022, hourly earnings for lower grade workers have risen 11.5% while prices have risen 14%. Living standards have been hit across the board, as wage increases fail to match price rises – there is no wage-price spiral.
And the inflation spike is not over, partly because the supply chain blockages remain, if at a lower level, and partly because productivity growth is so low that any increase in raw material or labour costs puts pressure on profitability, forcing companies to try and compensate by raising prices. But the ability to do that is disappearing fast.
I wrote a post last September that noted profit margins were beginning to fall. Profits are made up of the profit margin between costs of production and sale prices multiplied by total revenue from sales. During the post-pandemic recovery, US non-financial corporate profit margins (that’s the ratio of profits to per unit of costs) reached multi-decade highs as the surge in inflation boosted corporate pricing power while wages languished. A true profit-price spiral.
However, margins are now beginning to be squeezed. The average profit margin for the top 500 US companies in 2022 is estimated at 12.0%, down from 12.6% in 2021, if still well above the ten-year average margin of 10.3%.
And as overall economic growth in the US slows (real GDP yoy % in graph below), corporate sales revenue growth is slowing too.
And we can see that in the profits growth recorded by the US non-financial corporate sector. Indeed, in Q3 2022, profits fell.
And the slowdown in US corporate profits is replicated in all the major economies. Below is my latest estimate of global corporate profits based on five key economies. The pandemic slump recorded a 15% fall in global corporate profits in 2020, followed by a 40% recovery in 2021, but now profits growth has slowed to just 3.4% in Q3 2022. And note, as I have done before, that profits had stopped rising through 2019, that’s even before the pandemic, suggesting that the major economies were heading for a slump before COVID emerged.
I have argued before that there are two factors driving the US and other economies into a slump this year: the first is profits, which are heading south; and the second is the cost of borrowing and servicing debt. As for profits, I have argued on numerous occasions that they are the driving force of capitalist investment and therefore employment and income growth. If the profitability of capitalist investment falls and eventually leads to a fall in total profits, then investment and employment follow. So it is the strongest indicator of an impending slump in capitalist production. The close (if lagged) relationship between profits and investment is well established by several studies, including my own.
As for the cost of borrowing and servicing existing debt, the US Federal Reserve and other central banks are engaged in a severe monetary tightening by raising their basic interest rates that set the floor for other rates for borrowing; and by reducing the available money supply to raise debt. This is squeezing credit and ‘liquidity’ for companies. These two factors are what I have called the ‘blades of a scissor’ that are now closing, to end economic expansion and turn economies into recession.
A tremendous credit boom took place in 2022, which led a surge in US bank lending of $1.5trn.
Alongside bank loans, there has been an explosion in ‘low-quality’ lending that has brought debt loads in corporate America to record highs. The total US stock of “subprime” corporate debt (junk bonds, leveraged loans etc) has reached $5tn. According to the national accounts, total non-financial corporate debt (bonds and loans) stands at $12.7tn, making low-quality debt as much 40% of the total. This debt is financing very speculative or highly indebted companies either in the form of a loan (“leveraged loans”) or non-investment grade bonds (“junk bonds”) and includes corporate loans sold into securitizations called Collateralized Loan Obligations (CLOs); as well as loans extended privately by non-banks that are completely unregulated. Years of growth, evolution and financial engineering have spawned, yet again, a complex, highly fragmented and non-regulated financial market.
And this is replicated globally. Here’s last month’s annual report from the Global Financial Stability Board on the so-called Non-Bank Financial Intermediation (NBFI). It found that “the NBFI sector grew by 8.9% in 2021, higher than its five-year average growth of 6.6%, reaching $239.3 trillion. […] The total NBFI sector increased its relative share of total global financial assets from 48.6% to 49.2% in 2021.” The rise in high-risk, opaque subprime corporate debt has far-reaching consequences. Non-bank financial institutions such as hedge funds and private equity firms now account for a significant share of financial sector activity, despite enjoying far lighter regulatory and reporting requirements compared to banks and mutual funds – posing what is called “a systemic risk to financial stability”.
Up to now, because corporate profits have risen so much, even though corporate debt to GDP has risen to all-time highs, debt to profits has not (except of course for the 20% of companies deemed as ‘zombies’ ie not making enough profit to cover debt costs).
Most US firms have been able to cover their debt servicing costs comfortably up to 2021. But with debt costs set to rise even more over the next six months, if central banks stick to their monetary tightening, we can expect to see an increased inability for firms to cover their interest costs.
The blades of the scissor of slump are closing.
Michael Roberts Blog 
CPI can shrink because poverty has risen, can’t it?
I’m raising this question because I don’t think the supply problem has been solved at all by the USA – although, truth be said, it may well have been alleviated in relation to the peak pandemic era because it can still mobilize and recall lines of production from its vassals of the Third World and the rest of the First World – and that CPI may have fallen because consumption has fallen, not because there’s more food and fuel on the average American table.
For example: some American politician tweeted yesterday that eggs were USD 5.00 in the USA (at least, presume, at the region of her constituency). That would certainly rise supply by diminishing demand, assuming she’s telling the truth.
I stand by my hypothesis the American economy is shrinking in the Diderot sense. By that I mean the American people is withering: it is dying more, living less, and, while they’re living, they’re living worse than before at least the pandemic, and and quality of its intellectual and cultural production is declining. After this latency period of slow decline, there will be a steep phase of decline, that is, of collapse, characterized by the USA losing its capacity to win wars against its main enemies: China and Russia.
My take is the Pentagon is the USA’s absolute red line: as long as the Pentagon is doing fine, the American people is doing fine by all practical and realistic intents and purposes. When the Pentagon loses its legitimacy and/or its efficacy, then all of these social problems within the USA will blow up like a rocket in the sky, and a true process of collapse may begin.
And let’s not even start with the zombie problem, a process which I also like to call “reverse Perestroika” (or, more darkly, “American dekulakization”). There will come a moment where they USA, in order to save the system, will have to get rid of its middle class so that its capitalist class can continue with the process of elevating the American OCC; that would be a very traumatic moment in History for the American people, maybe even comparable to the Augustan census in Judea, which paved the way for the rise of Jesus Christ.
I think the reason inflation is dying is due to falling demand, we have seen this through the oil area where demand is simply dying down. When we look at the G5 credit impulse, it predicts we will have a hard landing and I mean it makes sense, inflation is dropping very fast and if we exclude housing, we are in an area of deflation.
vk,
That’s what the Great Reset is.
I don’t think the term Great Reset is scientifically valid because it presupposes a hidden cabal that is masterminding everything, when, in fact, there is no such thing. It is an occultist line of thought.
Capitalism is an anarchic mode of production. No crisis is every planned.
Good article and I agree with the conclusion that everything is down. But the down as measured by official data and non-Ga
I was waiting for the Congressional Budget Office to release its data for tax collection during the final quarter of 2022. It is a good way to double check the official data which is currently showing a sharp expansion in GDP for that quarter. In contradistinction, the tax data is showing an economy which is contracting. I know which set of data I would rely on. So here are the figures. To obtain them I took the whole of the previous financial year running from October 21 to September 22 in order to dilute the anomalies resulting from COVID changes which petered out by April 2021. Then I annualized the figures for the final quarter. Payroll taxes were down by 3.8% nominal and 10.8% adjusted for inflation (using the GDP deflator). Income taxes were down 24% and 34% (but here we find more of a COVID base effect) while Corporate taxes were down 1.2% and 8.2%. In all using its own weightings the CBO puts the fall in total tax collection at -1% nominal or 8% real.
(Should read) Good article and I agree with the conclusion that everything is down. But the down as measured by official data and non-GAAP profits is even more down. Link for the data below which applies to the January CBO report is https://www.cbo.gov/about/products/major-recurring-reports#9
Dissenting view for comparison: Dean Baker
https://www.counterpunch.org/2023/01/17/think-big-techs-thousands-of-layoffs-indicate-a-coming-recession-think-again/
It is amazing to think the people like the Bakers and the Quiggins think of themselves as left-wing mavericks.
Just did a search on JSTOR for “wage-price spiral” (exact phrase), which returned 1,542 results. Searched for “profit-price spiral” next: 4 results.
Similar parallels in a google search; 338,000 vs 3,600, a great many of the latter being just from the last few months. (When I do find something from more than a decade ago, it’s coming from pretty far out of the mainstream — e.g., a passage in Michael Parenti’s “Democracy for the Few.”)
This is about as one-sided as a topic gets, even in a field as one-sided as economics.
I haven’t read it yet but hope to make comments after I finish reading the book or article!